Tesoro Logistics' (TLLP) CEO Greg Goff on Q4 2015 Results - Earnings Call Transcript

| About: Tesoro Logistics (TLLP)

Tesoro Logistics LP (NYSE:TLLP)

Q4 2015 Earnings Conference Call

February 2, 2016 12:00 ET

Executives

Evan Barbosa - Investor Relations Manager

Greg Goff - Chairman and Chief Executive Officer

Phil Anderson - President

Steven Sterin - Chief Financial Officer

Analysts

Brian Zarahn - Barclays

Shneur Gershuni - UBS

Kristina Kazarian - Deutsche Bank

Ryan Levine - Citigroup

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2015 Tesoro Logistics LP Earnings Conference Call. My name is Woine, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to Evan Barbosa, Investor Relations Manager. Please proceed.

Evan Barbosa

Good morning and welcome to today’s conference call to discuss our fourth quarter 2015 earnings. Joining me are Greg Goff, Chairman and CEO; Phil Anderson, President; and Steven Sterin, CFO.

The earnings release, which includes financial disclosures and reconciliations for non-GAAP financial measures should help you in analyzing our results and can be found on our website at tesorologistics.com.

Please refer to the forward-looking statement in the earnings release, which says statements made during this call that refer to management’s expectations and/or future predictions are forward-looking statements intended to be covered by the Safe Harbor provisions of the Securities Act as there are many factors which could cause results to differ from our expectations.

Now, I will turn the call over to Phil.

Phil Anderson

Thanks, Evan. Good morning and thank you for joining us today. I will review our fourth quarter and full year 2015 financial performance and then turn the call over to Greg.

Let me start by saying 2015 was a transformative year for the company and we are very proud of what we delivered despite a very challenging and difficult market environment. Yesterday, we reported full year adjusted EBITDA of $636 million, an increase of 100% over 2014 and pro forma distributable cash flow of $458 million, a 109% increase over 2014. For the fourth quarter, adjusted EBITDA was $155 million, an increase of 65% from a year ago, as we realized the benefits from the Rockies natural gas business and the completion of several key growth projects.

Full year and fourth quarter results for 2015 were reduced by approximately $24 million for an environmental accrual representing an increase in the expected remediation costs associated with the 2013 crude oil pipeline release at Tioga, North Dakota. As we have advanced in the remediation process, we identified additional impacted soil, which requires treatment over the next couple of years. We remain committed to work with the landowners in the state of North Dakota to expeditiously complete the remediation process and return the land to agricultural use.

Distributable cash flow for the fourth quarter was $104 million, an increase of 104% from a year ago. On January 20, we announced our 19th consecutive quarterly distribution increase of approximately 4% or more. The fourth quarter distribution was $0.78 per limited partner unit or $3.12 per unit on an annualized basis and represents a 17% year-over-year increase. Our distribution coverage ratio was 1.07x for the fourth quarter and 1.37x for the full year, pro forma for the QEPM merger.

Now, turning to our operations for the fourth quarter. In our Gathering segment, crude oil gathering continued to grow on our North Dakota System with throughput of approximately 205,000 barrels per day. Volumes increased approximately 3% sequentially and approximately 37% year-over-year primarily due to the completion of the Connolly Gathering System and additional volumes connecting to the system from third-party gathering systems.

Fourth quarter revenue from minimum volume commitments was approximately $3 million or the equivalent of 30,000 barrels per day. We continue to see volumes from the core of the Bakken coming on to the pipeline in the first quarter of 2016, which we believe reflects a combination of new production and existing wells being connected to our system. In the first quarter, we expect to complete a fully committed tank at our Bakken area storage facility, which will bring us to over 1 million barrels of committed storage and we have begun the construction of the Charging Eagle Gathering System, which we expect to complete late in 2016.

Additionally, we believe Tesoro’s acquisition of the Great Northern Midstream assets should generate some new opportunities for us. This includes the potential connection of the Bakken link in High Plains Pipeline, which would generate new market destinations for producers. It would also allow volumes on the High Plains System to flow to the Great Northern Fryburg Rail terminal. We also believe connecting the two pipeline systems could create some capital efficiencies, while allowing us to relieve some of the congestion at certain points on the Tesoro High Plains System.

Moving to trucking, we reported approximately 28,000 barrels per day during the fourth quarter, which was in line with our expectations. Volumes continue to decline due to the shift of trucking volumes to pipeline gathering volumes, like the Connolly Gathering System. We expect trucking volumes to continue to moderate as the shift from trucking to gathering systems increases. Our proprietary volumes actually increased during the quarter as we continue to optimize our fleet and release lower margin contract haulers.

Shifting to natural gas gathering, throughput in the fourth quarter was approximately $1.1 million MMBtus per day, a slight decline from the third quarter, but in line with our seasonal expectations as we move into the winter months. Despite a challenging commodity price environment, natural gas gathering volumes stayed resilient in 2015 and increased nearly 5% year-over-year, reflecting improvements in producer efficiencies and in the basins where we operate. We expect first quarter 2016 volumes to be flat to slightly down due to typical seasonality for the business as we do not connect new wells in certain areas and experience throughput constriction in the winter months.

In the Processing segment, we reported fee-based volumes of approximately 748,000 MMBtus per day. The decrease in volumes during the quarter is consistent with our expectation for seasonal declines. However, winter weather-related issues further affected volumes. We reported NGL processing throughput of approximately 7,800 barrels per day, which was flat from last quarter. On an annual basis, fee-based processing and NGL processing throughputs increased 8% and 20% year-over-year respectively primarily due to NGL yield optimization. We expect natural gas processing volumes to be flat to slightly down on the first quarter of 2016 due to fewer well completions during the winter months.

Moving to Terminalling, we reported approximately 943,000 barrels per day for the fourth quarter, a decrease of 2% sequentially and an increase of 4% year-over-year. The contributions from the new Anacortes Washington terminal completed in November helped to offset some of the impact of typical seasonal driving patterns and some downtime at Tesoro’s West Coast refineries during the quarter. For the first quarter of 2016, we expect modest volume growth and also expect revenue per barrel to increase driven by a full quarter’s contribution from the Los Angeles storage assets dropdown that was completed in November.

Turning to Transportation Pipelines, throughput was approximately 841,000 barrels per day, which was in line with our expectations. Volumes were flat sequentially and increased approximately 3% year-over-year. For the first quarter 2016, we expect to see modest volume growth partially offset by planned maintenance activity on our Northwest Products System pipeline.

Turning to capital expenditures in the fourth quarter, we spent $51 million net of reimbursements. This includes $40 million of net growth capital and $11 million of net maintenance capital. Full year 2015 net capital expenditures were $268 million. This includes approximately $224 million of net growth capital and $44 million of net maintenance capital. Our full year growth capital expenditures were lower than we had planned primarily due to the Connolly Gathering System project coming in under budget, as well as deferred timing of some Rockies producer backed compression projects and then also executing some of the plans pending at Tesoro.

Looking ahead, you can find details of our volume expectations and other elements relating to our first quarter outlook in our earnings release issued yesterday.

With that, I will turn the call over to Greg.

Greg Goff

Thank you, Phil and good morning everyone. As Phil mentioned earlier, 2015 was a transformative year for the company as we continued to execute our strategy to grow TLLP’s integrated full service logistics business. Volumes in our business segments continue to grow in the phase of a challenging and difficult commodity price environment. We successfully grew in almost every phase of the business versus last year’s fourth quarter. Our crude oil gathering volumes were up 37%, natural gas gathering volumes increased 5%, fee based processing and NGL processing throughput increased 8% and 20% respectively. Terminalling volumes were up 4% and transportation pipeline volumes were up 3% year-over-year.

Our business performance was driven by the successful integration of the Rockies natural gas business, delivery of several organic growth projects like the Connolly Gathering System and contributions from the Los Angeles Storage and Pipeline Assets acquisition. For the full year, the Rockies natural gas business contributed $285 million of adjusted EBITDA, above our target of $275 million. Based on the combined value of the acquisition the Rockies natural gas business for $2.5 billion and the approximately $400 million value for the QEPM merger, we realized an implied multiple of approximately 10x EBITDA in our first full year of ownership. This was the year ahead of our original goal. Because of our successful integration, we were able to capture approximately $30 million of synergies in the full year 2015, exceeding our $25 million target.

Additionally, we continue to grow our portfolio with strong fee based infrastructure through the acquisition of the Los Angeles Storage and Pipeline Asset acquisition in November. We also announced several new organic growth projects that should position TLLP for future growth in 2016 and beyond. This includes the Charging Eagle Gathering System, a crude oil and produced water gathering and treating system in the Bakken region, a project to increase gathering and compression in our Uinta natural gas gathering system in the Rockies. We are continuing to develop the Los Angeles refinery interconnect pipeline system project that will serve as a core connection between the Carson and Wilmington portions of the Tesoro’s Los Angeles refinery. While conditions in the commodity and MLP equity markets remain challenging, we remain focused on executing our strategy and delivering on our commitments.

Now regarding Tesoro’s recently announced acquisitions, which will add to its inventory of drop-down opportunities for TLLP. First, Tesoro announced its intent to acquire two terminals in the wholesale fuels distribution business with over 600,000 barrels a day of storage truck racks and rail loading capabilities and increase in Anchorage and Fairbanks, Alaska, which would integrate well with TLLP’s existing Alaskan footprint. Second, Tesoro acquired Great Northern Midstream, Bakken area logistics provider with crude oil gathering and transportation pipelines, storage and a rail-loading terminal. As Phil mentioned earlier, the Great Northern Midstream assets fit well with TLLP’s High Plains Pipeline in the Bakken and provide some new opportunities to enhance delivery options for the producers.

To give us additional financial flexibility on January 29, 2016, we increased our available credit capacity by $700 million while lowering our borrowing cost and improving our covenant structure. We syndicated a new $1 billion secured drop-down credit facility and decreased the aggregate available capacity on the revolving credit facility to $600 million from $900 million. We continue to monitor the upstream market, our customer spending plans and the challenges that currently exist. We also see that continued growth in refined products demand and believe we can manage our growth capital to help us achieve our strategic goals.

Let me conclude by saying, we continue to drive business improvements, optimize our asset base and build our inventory growth of high return growth projects in order to grow our full service logistics business. With strong support from Tesoro, solid financial flexibility and continued opportunities for growth, we believe TLLP is well positioned strategically in the current challenging market environment.

And with that, we will now take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brian Zarahn, Barclays. Please proceed.

Brian Zarahn

Good morning everyone.

Phil Anderson

Good morning Brian.

Brian Zarahn

With commodity prices still remaining low since your Analyst Day, how do you think doesn’t seem like you have changed your EBITDA guidance or your volume outlook, maybe a little more color as to why the maintained expectations and anything incremental on volumes on your gathering system?

Phil Anderson

Hi, Brian. This is Phil. So since the Analyst Day, I would tell you that we don’t know anything different than I think we knew in December. All of the projects that we were driving to deliver EBITDA in 2016 are well on their way towards delivery at this point. Relative to volumes continuing to come onto the system in the Bakken, we are seeing that happen right now. So obviously, conditions continue to struggle, it feels very difficult out there, but in the near-term at least, we have not seen anything that we would feel like changes any of our near-term plans at this point.

Brian Zarahn

And then on still, staying on the gathering on the crude or gas side, does one have you feel more comfortable with or they are sort of tied together in terms of your producer customers?

Phil Anderson

So, in terms of volume metrics I think taking the different pieces, the Bakken piece isn’t completely dependent on overall volumes in the field. Our strategy there runs fairly independent of that. In the gas side, obviously that is dependent, really later this year, on the pace of drilling. And we obviously see that current pace and that’s what our plans are really built around at this point. So if we saw something changed there, it would potentially have an impact later this year. And on the downstream side, which is a very significant piece of our overall portfolio, we continue to see good trends and demand and expect to remain very, very active in that area this year.

Brian Zarahn

Okay. And then turning to capital spending, it seems like your drop-down plans are unchanged, given you have increased your liquidity, I guess on the organic side, how do you think about your roughly $425 million budget and potential for it deferrals or timing changes on those projects?

Phil Anderson

So Brian to your point, I think the key to our year is really flexibility. And so, we are looking at our capital plans for this year and really understanding where the flex points may be around timing or deferrals or even projects where we have a dependency on producers. But right now, again we don’t know anything different at this point to report.

Brian Zarahn

And last one from me on the distribution policy, you have been maintaining the 17% growth rate, you have coverage to continue to pay that out, but if market conditions remained weak and the stocks really aren’t getting valued for high growth, how do you think about potentially changing that target?

Greg Goff

As we look at it today and we look at our plans for the next couple of years, the plan we laid out at our Investor Day gives us plenty of room to invest in the business due to dropdowns and still maintain a healthy coverage ratio on that type of distribution. Longer term, as we have said though, just given the size of the business, relative growth rate, we are seeing that distribution drop more than 10 to 15 range makes more sense longer term. Right now, I think it would be too early to call any change to that. As Phil said, we don’t see it in our business. Our businesses are performing well. And as the year goes on, we will continue to evaluate much if anything changes.

Brian Zarahn

Thank you.

Operator

Your next question comes from the line of Shneur Gershuni, UBS. Please proceed.

Shneur Gershuni

I got a couple of similar questions maybe asked a different way. I was wondering if we can sort of talk about the dropdown potential? And sort of I guess the context of what if we have a shortfall in gathering and processing volumes, when the Rockies, by your math, when you sort of look at your projections through 2018, you are expecting a high single-digit type of growth rate? Would TSO be willing or they able to provide incremental dropdowns to make up for any of those shortfalls, so that you can maintain the same distribution growth rate through 2018?

Greg Goff

I think the key to the dropdowns if you setback that we had a plan coming this year for two dropdowns, the Great Northern assets that were mentioned earlier as well as the Alaska business once we complete that. And we are preparing and readying ourselves to be able to do those. We have some additional flexibility with the revolver enhancement that we have done. However, as we step back and look at it, there is got to be some line of sight to stabilization, particularly in the debt markets within the MLP space. And fund flows have been very, very poor there so far. And so we are going to remain agile to be able to move on those dropdowns once we see clear signals on the debt side that there is the ability to go out and monetize those revolvers until longer term financing. So, that’s our plan as we go in. We will continue to evaluate and as Phil mentioned remaining flexible to continue to pursue the organic growth, be ready to do the drops when we think the timing is right.

Shneur Gershuni

And I completely appreciate the mechanics of how difficult the market is right now from a drop. So, I am just saying like from a hypothetical basis, if your EBITDA projection is coming $50 million or $80 million is light of what you are expecting for 2018, is there incremental inventory that hasn’t been identified as a specific dropdown that can be added to that bucket assuming the market is there to be able to accept it, so that you can make up for the EBITDA shortfall and still maintain your distribution growth rate?

Greg Goff

Yes, this is Greg Goff. So, that’s not how we look at the business. So, 2018 is 3 years away and we have a number of organic growth projects, the existing business, dropdowns, a whole variety of things to do. So, we will look at delivering on the plans that we have laid out in those areas. They are prioritized and focused dropdowns is kind of the last area to grow the EBITDA of the company. And so we don’t, going out to 2018, it would be absolutely premature to comment on lots of things can change between now and then whether we are going to use dropdowns as an insurance policy to hit our EBITDA target, that’s not how we look at the business. We see good line of sight in the near-term and don’t see any real major issues yet that we would have to deal with.

Shneur Gershuni

Okay, fair enough. In your prepared remarks, you were talking about the benefit of shifting away from trucking towards pipelines. I was wondering if you could remind us what the margin pickup is or the benefit in that transition way so that we can track it on a go-forward basis?

Phil Anderson

Yes, this is Phil. What I would tell you is generally on a gathered barrel, our revenue is going to be $0.75 to $1 per barrel. There is very little cost other than recovering the investment on the gathering system, whereas trucking which is much higher revenue per barrel, but has a very high cost associated with it, where on a third-party hauler and obviously this varies, but your margin could be as low as $0.20 or something like that. When we utilize our own trucks, it can be upwards of $0.50, $0.60.

Shneur Gershuni

Well, okay. And I assume you have sort of baked that into your guidance and that’s already baked into the expectations effectively, is that fair or is that incremental upside?

Phil Anderson

No, that’s fair. So, we utilized our – while you saw total volumes go down, we actually increased our proprietary volumes inside of that quarter-on-quarter and we are pretty much at full utilization at this point internally, which helps us maximize EBITDA overall.

Shneur Gershuni

Okay, great. Thank you very much. Appreciate the answers to the questions.

Operator

Your next question comes from the line of Kristina Kazarian, Deutsche Bank. Please proceed.

Kristina Kazarian

Hey, guys.

Greg Goff

Hi.

Kristina Kazarian

On the TSO call earlier, you guys listed out four drivers you are working on for TLLP? Can you just touch a bit for us near-term and long-term how I should be thinking about the priorities for third-party M&A for logistics relative to organic growth and dropdowns and just how I see those options scaling over time in terms of magnitude?

Greg Goff

So, Kristina, this is Greg. I think that the – on the TSO call that you just referenced, we gave those in order of priority as if you were to go back and pick up what we said. And that’s unchanged really, that’s kind of what we have been focused for a long time. We don’t see any fundamental change in our focus on that. The scope is probably a little bit difficult to talk about in the environment. I think from an organic growth standpoint, what we have tried to lay out in the approximately $400 million of organic growth opportunities is a reasonable estimate of what we see from a potential standpoint. From an acquisition standpoint, I think probably the opportunity is for smaller type acquisitions that are probably not a lot different in scope relative to dropdowns kind of like what we, Phil or someone mentioned earlier about both the Alaska and the Great Northern system. So, I think if you look at the scale of those type of things, those what we are seeing out in the marketplace now, which is easy to do and probably more importantly, the quality of those type of opportunities add just more value and fit into our portfolio really well. And so that’s kind of the scope of those and then the dropdowns. We don’t see any real significant change in the scope of dropdowns kind of in that, approximately $50 million, give or take both sides of it at the EBITDA on an annual basis.

Kristina Kazarian

And Greg am I right in reading into that, it’s a lot of what was focused on 2015 transformational logistics. 2016 is going to have a heavier marketing component similar to the two acquisitions that you guys did that we have already touched on, is that fair?

Greg Goff

No, so maybe better clarify your question a little bit, Kristina, so I understand it correctly. When you say marketing, I am not sure what you mean?

Kristina Kazarian

I mean like some things that you guys can do to tie assets together, sorry.

Greg Goff

Within Tesoro Logistics?

Kristina Kazarian

So, like with Great Northern tying into the High Plains pipelines are the two terminals tying into the existing Alaska stuff?

Greg Goff

Yes. I mean, that’s kind of part of our strategy being able to stay how that strong connection between Tesoro and Tesoro Logistics and how across our whole value chain we can capture those opportunities. So hopefully, during 2016, we will find a lot more opportunities to do just that.

Kristina Kazarian

Okay. And then one last clarification question, can you just help me think about the implications from the Dominion Questar deal that happened this week and any read through on either your relationship with WESCO or how I should be thinking about Questar stuff for you guys? That would be helpful.

Phil Anderson

Yes, I have obviously, this is Phil, been watching that transaction very closely. Questar is a very important customer to us in the Rockies. All of our business with Questar is really laid out under life of reserve type contract. So, I think we remain comfortable that in the areas that we do business with them, we will continue to do business with them. We have worked very hard since that acquisition to develop a strong relationship with Questar and obviously strengthening that company overall is probably a good thing for us long-term.

Kristina Kazarian

And then I know historically, there we talked about some sort of optionality, maybe around the Southern Trails Pipeline at some point in the future, anything I should be thinking about there now that it’s kind of shifted into new hands?

Phil Anderson

I don’t think so. I think that remains a separate strategic opportunity that may make sense at some point, but I don’t think either party is working on anything there right at this moment.

Kristina Kazarian

Perfect. Thanks guys. I really appreciate it and nice job.

Phil Anderson

Thank you.

Operator

Your next question comes from the line of Ryan Levine, Citigroup. Please proceed.

Ryan Levine

Hi, is the new $1 billion syndicated drop-down facility flexible enough to allow to be used to fund third party acquisitions or is it entirely for drop-downs?

Phil Anderson

We do have some flexibility with it, but we probably consider using the other facility for that but we do have optionality on that.

Ryan Levine

Okay. At your Analyst Day, you had mentioned that a portion of the organic growth CapEx was contingent on crude prices north of $50, in light of the current commodity price outlook are you looking to replace any of that organic spending with third party acquisitions such as the recent deals that you have done, any color on that?

Phil Anderson

Ryan, this is Phil. I don’t recall off hand linking anything directly to the crude price. I think we may have said there is certain production in the field that makes more sense with higher value, certainly. Relative to the projects like I said that we have on our radar screen right now for 2016 in the Bakken, we are moving forward with them, we see continued development in those areas and we are reasonably comfortable with our plans there. Obviously, more – higher prices will ultimately in general, more production, which will generate greater opportunities. But in the near-term, we are pretty comfortable with what we are working on.

Ryan Levine

Okay. And just a follow-up, I mean given the flexibility around this drop-down facility and some questions around organic CapEx over the long-term, I mean are you looking more aggressively at third party deals now or is everything status quo?

Phil Anderson

No. I think as Greg said there is a constancy to our strategy to look at opportunities and we will always favor acquisitions when we have a significant amount of value to capture across the overall Tesoro TLLP value chain. And I don’t think that’s really changed.

Ryan Levine

Okay. And then shifting gears to the $24 million charge, how should we be thinking about that, it looks like you – it was not adjusted in your adjusted EBITDA for the quarter, should we be viewing that as a one-time item or is there is an element of that that could be reoccurring?

Phil Anderson

No. That is taken as a one-time accrual based on our estimation of the full extent of the remediation up there.

Ryan Levine

Is there any additional potential liability associated with that remediation that may not covered by insurance?

Phil Anderson

At this point, we have not had any third party claims at this point through that process. And I don’t believe we had any threatened either. So at this point, we continue to work, as I have said in the comments, with the landowners’ interest and full cooperation with the state to return that land to full agricultural capabilities. Operator, do we have any other questions?

Operator

There are no additional questions at this time.

Evan Barbosa

It looks like our Q&A have been dropped, let’s ask callers if there is any further questions to hit the right keys. Operator, can you give them that instruction?

Operator

[Operator Instructions]

Evan Barbosa

If anybody got disconnected on the Q&A, if you have any follow-up questions, please call us, we will be happy to answer your questions.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect and have a great day.

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